Second quarter earnings: Holding cos. show signs of life in U.S.

agency holding companies pointed to some blue skies in their second-quarter earnings-and surprisingly, most are over U.S. shores.

Interpublic Group of Cos., Grey Global Group and Publicis Groupe all showed organic growth in their U.S. operations during the second quarter-after factoring out currency exchange and acquisitions. In many cases, it was the first gain in over a year.

But all also reported the European markets remain troublesome and the outlook cloudy. Earlier this month, Omnicom Group showed growth in nearly all U.S. operations, and Havas reported the U.S. was the bright spot in an otherwise dismal second quarter (AA, Aug. 4) .

"America is definitely picking up," said Publicis Chairman-CEO Maurice Levy. Europe, on the other hand, is still showing spotty improvement, with the French market continuing to decline, and the outlook for the region still uncertain, he said.

While still keeping an arms-length distance from Interpublic's stock, Wall Street analysts did take note of its domestic growth and management's forecast of more improvement in the third quarter and beyond.

International still down

"While international revenue continues to decline, we are encouraged by signs of life in the United States," said William Blair analyst Troy Mastin. In a note to investors, he noted the Interpublic's domestic organic revenue growth was the first in over two years and the overall revenue decline was the smallest since the second quarter of 2001.

Sean Orr, the outgoing chief financial officer at Interpublic, said the second quarter was a "mixed bag of financial progress and operational challenges." While Interpublic's U.S. organic revenue growth was "the first increase in some time," overall growth continues to be spotty, he said.

The U.S. companies have been helped so far this year-and their European rivals hurt-by the weakness of the U.S. dollar against both the euro and the British pound. The dollar's exchange rate rose 10.6% against the euro and 3.8% against the pound between January and June 30, the end of the second quarter. For Interpublic, currency meant the difference between eking out a 0.9% revenue increase in the first quarter, and a drop of 5.4% after factoring out currency and acquisitions.

The weak dollar and strong U.S. results also boosted Grey Global Group, which posted $4.74 million in net income for the second quarter, up 184%. Revenues of $319.9 million were up 10.3% or 2.2% factoring out currency. North American revenue rose 4.9%, while international revenues were down 1% after adjusting for currency. The company attributed the sharp net income increase to easier comparisons to a weak quarter in 2002 and to an early start to the traditional second-half pickup of marketing activity.

publicis revenue up

Publicis' second-quarter revenue rose 59% to $2.11 billion, thanks to the acquisition of Bcom3 Group last September. After factoring out acquisitions and currency, revenue still rose 1.2%, the first quarterly increase since the fourth quarter of 2001. The North American region-Publicis' largest revenue source-showed 80.1% growth in revenue, or 4.6% on an organic basis. Europe, the second-largest contributor, rose 37.9%, but was down 2.4% on an organic basis.

The outlook for the rest of the year is upbeat, with the U.S. continuing to show improvement, offset by the uncertainty in Europe, Mr. Levy said. Publicis will report full first-half results Sept. 10.

net loss

Interpublic posted a net loss of $13.5 million, down from net income of $109 million a year ago, partly due to the effect of a planned $200 million restructuring charge. Revenue was up 0.6% to $1.5 billion, helped by the dollar's weakness against foreign currencies, but was down 3% on an organic basis. Notably, however, U.S. revenue was up 1.7%, or 1.4% on an organic basis, while international revenue fell 0.7%, or 8.1% on an organic basis. Interpublic also took the first $94.4 million of $200 million in charges as part of a restructuring initially announced last May. The rest will be charged in the third and fourth quarters.

The restructuring includes eliminating 1,450 positions and closing or consolidating 30 locations, said Mr. Orr, who leaves Interpublic at the end of August. About 70% of the layoffs were in global operations, mainly in McCann-Erickson Europe, said CEO David Bell. The layoffs won't be completed until the end of August, so the effects won't be noticed until the third quarter and beyond, he said.

Mr. Bell noted Latin America and Europe remain weak. He singled out some bright spots in the U.S., including a stabilization in the public relations business, continued strength in healthcare and media and firmer business at the Jack Morton Worldwide as more corporations have begun to schedule events again after the end of the Iraq war.